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What do the Personal Injury Reforms mean for our Brokers

The Government has now confirmed that the reforms to the personal injury claims regime will come into effect on 1st October 2018 when the Prisons & Courts Act becomes law.

The key changes are:

The Small Claims limit for all road traffic accident matters will increase from £1,000 to £5,000.

The Small Claims limit for non-RTA cases will increase from £1,000 to £2,000.

A new damages tariff for most RTA soft tissue injuries (whiplash) will be introduced.

Offers to settle claims before a medical report is obtained will be banned.

Prior to the publication of the Prisons & Courts Bill, it was widely assumed that the Small Claims limit would be increased fairly quickly and that any tariff for whiplash claims might follow at a later date, so the Government’s decision to implement all of the changes in October next year will have come as a nasty shock to RTA personal injury lawyers.

What do the changes mean?

At present, RTA personal injury claimants who have not arranged legal protection insurance will most likely be directed to a law firm happy to run the case in return for a 25% contingency fee. The claimant will also be expected to arrange ATE cover which is likely to cost around £50 for portal cases.

Currently, the average award for soft tissue injuries of 4 – 6 months duration is £2,150, so the cost to the claimant amounts to £587.50 including ATE cover, leaving a net award of £1,562.50.

The claimant’s lawyer will, in addition to the deduction from damages, also recover fixed costs of at least £200 but more likely £500, so the lawyer’s total income normally amounts to just over £1,000.

The increase in the Small Claims limit alone would have seen lawyers adjust their business model to take a higher contingency fee percentage, in order to compensate for the reduction in fixed recoverable costs. For example a 40% deduction from an average award still nets £860, plus some small recoverable costs.

However, the killer blow for claimant RTA lawyers (and those injured in accidents) is the introduction of the whiplash tariff. The typical £2,150 paid out under the current system falls to just £450 under the tariff, so even a contingency fee of 40% still only produces an income of £180 which (most lawyers would say) is not enough to cover the cost of running the claim.

In any event, it is doubtful that a typical claimant will be bothered to make a claim in the first place if their net award is likely to be as low as £270, especially as they will have to go through the process of being medically examined. It’s difficult to be precise at this stage, but it would be very surprising if the total number of RTA claims brought by those who do not have legal expenses insurance did not drop by at least 50 percent.

Legal Expenses Insurance

A significant number of motorists already purchase Motor Legal Expenses Insurance (MLEI) and this cover becomes even more necessary under the new regime. The reduction in typical damages of nearly 80 percent is bad enough for innocent victims but if this is also accompanied by a contingency fee deduction, then the whole situation becomes untenable.

At least those with MLEI will keep 100 percent of what compensation is available and this should be a strong selling point for all motor insurance brokers or other retailers.

Of course, brokers also enjoy a significant income stream from MLEI sales, with a typical commission of at least £25 per policy thanks to the very low net premium rates currently available in the market. Now that the extent of the personal injury changes are known, there will of course be a sharp upward movement in net premiums charged by MLEI providers, as they will no longer be able to get lawyers to handle injury claims free of charge and will in future have to pay the lawyer’s fees. Whereas today’s net premium might be less than £1.00, going forward this is likely to increase to £7.00 – £8.00, thus reducing the broker’s margin.

However, we will probably begin to see brokers increasing the retail price of MLEI to make up for some of the increase; for example an increase from £30 to £35 is unlikely to have any significant impact on take-up rates and the increased need for cover will help maintain or improve sales levels.

Motorcyclists

The new whiplash tariff does not apply to motorcycle accidents. Therefore, motorcyclists will remain entitled to current levels of compensation, all the more reason why they need MLEI cover to avoid a large cash deduction by way of a contingency fee. Indeed, it is hard to see how the demands and needs of a motorcyclist are properly met if their motor insurance does not include legal expenses insurance cover.

Unintended Consequences

For non-RTA claims (EL, PL and so on) the new Small Claims limit is £2,000, up from £1,000.

This will cause some claims inflation. Cases that currently settle for £1,500 will in future settle for just over £2,000, so good news for claimants and lawyers operating on a contingency fee, but bad news for insurers.

Informed observers have suggested that the new RTA personal injury regime will result in tens of thousands of redundancies as personal injury lawyers close for business. Although the Government has brushed this claim aside, it does seem pretty obvious that a lot of RTA law firms will now disappear; this process has been ongoing for some time and will now accelerate rapidly. Even those lawyers with strong relationships with legal expenses insurers may find that the insurers now choose to run the cases in house without having to go through the bother of setting up an ABS law firm, as of course you don’t need to be a lawyer to run a case in the Small Claims Court.

However, claimant lawyers have learnt to be adaptable over the years and new business models will also emerge, although whether they will prove sustainable remains to be seen. Given that non-RTA claims remain attractive work, we can expect a surge in these as new types of claim are mined by claims management companies (according to ABTA, there has been a ‘dramatic increase’ in holiday sickness claims, for example).

What should Brokers Do Now?

October 2018 may seem a long way off, but in reality legal expenses providers will want to renegotiate terms on MLEI deals within the next six months in order to avoid having live unexpired risks after October 2018 which have been priced according to the current costs regime.

Therefore, in order to avoid having to simply accept whatever pricing changes are imposed by a current provider, brokers should start looking at market offers as soon as possible in order to enable future income planning.

MLEI providers which have planned ahead for the new regime will be able to offer brokers transitional deals from October this year which lead into long term pricing structures from October 2018 onwards, so the message to brokers is: start planning ahead now and don’t be caught out.

Motor Legal Protection Plus cover from Legal Protection Group provides up to £100,000 of legal costs cover for accident and injury claims, contract disputes, defence of prosecutions and vehicle cloning and MIB problems.

We are ready to provide transitional pricing structures ahead of the enactment of the new law and a very competitive pricing structure in the longer term.

Legal Protection Group Limited (firm reference number 749446) is an appointed representative of Eldon Insurance Services Limited (firm reference number 477112). Eldon Insurance Services Limited is authorised and regulated by the Financial Conduct Authority.